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Little Evidence Corporation Tax Scares Off Multinationals, Says Report

For years the British public has been told that the government cannot raise corporation tax. At a time when it is easier than ever to move money around the globe, increasing corporation tax is like squeezing a balloon: try to increase revenues in one country and the profits will be shifted somewhere else.

Government ministers have used this argument to justify cutting the UK’s corporation tax rate from 30% in 2005/06 to just 19% today. This is the lowest rate in the G7, and one of the lowest rates of the 35 countries in the OECD. A further reduction to 17% is still planned within this parliament. With the total rate of tax on corporate profits at just over 30% in Germany and 33% in France, the UK has effectively taken the ‘low road’ to tax competitiveness, like countries such as Ireland and the Netherlands.

Meanwhile, the same governments have set about reducing the size of the state: government spending has been reduced from around 45% of GDP in 2010 to just 39% today. School budgets have been cut by £3bn since 2015; local councils will have a funding gap of almost £6bn by 2020; and the NHS will have a deficit of almost £30bn by the same year. At the same time, there has been a dramatic spike in child poverty, crime and homelessness – reversing trends going back decades.

Any resistance to corporation tax cuts has been branded ‘economic illiteracy’ by right-wing politicians and economists. They claim there is no alternative: we must reduce corporation tax or face an outflow of profitable, job-creating companies.

But a new report from the Institute for Public Policy Research (IPPR) shows that, whilst it may be convenient for those who benefit from low taxes, there is little economic evidence for this argument.

A systematic review of the evidence on multinational tax behaviour shows that high rates of corporation tax do not encourage multinational firms to leave the country. Germany, France and the US (even after Donald Trump’s tax cuts) all have higher rates of corporation tax than the UK, and yet they still manage to raise substantial revenues.

The reason is that, just like individuals, companies choose where to locate based on much more than just the tax rate. The availability of skilled labour, the quality of the country’s infrastructure, its legal system and economic institutions are just as – if not more – important considerations. Expecting corporations to pay their fair share for the services they rely on – whether a skilled workforce, public infrastructure, or a basic system of contract enforcement – is just common sense.

Others argue that raising corporation tax merely encourages multinationals to avoid it. For years, the government has been claiming that reducing the corporation tax rate would discourage ‘profit-shifting’ by multinationals, whereby profits are claimed in low-tax countries. Unsurprisingly, this effect has failed to materialise, and instead we have been left with a shrinking tax base at a time when demands on spending have never been higher.

For this reason, IPPR’s report calls for reform of the system of corporate taxation. First, it proposes an increase in the corporation tax rate by 5% to 24%, and a simultaneous reduction in employers’ national insurance contributions by 2% to 11.8%. This would shift the burden of taxation from companies which employ a lot of people but are not highly profitable to those with fewer workers and higher profits.

Second, the IPPR report proposes the introduction of a new tax to combat profit-shifting by multinationals. The ‘Alternative Minimum Corporation Tax’ would link a company’s tax liability to its sales or turnover in the UK, to ensure that firms were not able to avoid taxes by shifting their profits to low-tax jurisdictions.

The government’s corporation tax cuts represent a giveaway to multinational corporations at the expense of the productive businesses that are such a critical part of our economy. The failure to attack these measures for what they are has been an open goal for the left. It is time for a new narrative on corporation tax, based on a progressive view on businesses’ responsibilities to the societies in which they operate.

Published 8th March 2018

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